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Hastings Business Law Journal Volume 17 Article 4 Number 2 Summer 2021 Summer 2021 Financial Benchmark Control as Monopoly Power Sharon E. Foster Follow this and additional works at: https://repository.uchastings.edu/hastings_business_law_journal Part of the Business Organizations Law Commons Recommended Citation Sharon E. Foster, Financial Benchmark Control as Monopoly Power, 17 Hastings Bus. L.J. 233 (2021). Available at: https://repository.uchastings.edu/hastings_business_law_journal/vol17/iss2/4 This Article is brought to you for free and open access by the Law Journals at UC Hastings Scholarship Repository. It has been accepted for inclusion in Hastings Business Law Journal by an authorized editor of UC Hastings Scholarship Repository. For more information, please contact wangangela@uchastings.edu.
2021 FINANCIAL BENCHMARK CONTROL 233
Financial Benchmark Control as Monopoly
Power
By SHARON E. FOSTER*
I. INTRODUCTION
Financial benchmarks control the price of an underlying asset.
Control of price may evidence monopolization. This article examines
financial benchmarks as currently utilized in financial markets,
explains how financial benchmarks control price, establishes that
financial benchmarks control price and explores United States
antitrust law as it relates to monopolization by control of price.
Additionally, this article extrapolates from the above issues of
monopolization financial benchmark reform viability.
As used in this article, a benchmark is defined as: prices, rates,
indices or figures that are: a) Made available to users, whether free of
charge or on payment; b) Calculated periodically, entirely or partially
by the application of a formula or another method of calculation to,
or an assessment of the value of, one or more underlying assets, prices
or certain other data, including estimated prices, rates or other values,
or surveys; and c) Used for reference for purposes that include one or
more of the following: determining the interest payable, or other
sums due, under loan agreements or under other financial contracts
or instruments; determining the price at which a financial instrument
may be bought or sold or traded or redeemed, or the value of a
financial instrument; and/or measuring the performance of a
financial instrument.1
The financial benchmarks discussed in this article include
financial market benchmarks, such as interest rate benchmarks,
foreign exchange benchmarks and certain commodity market
* Leflar Law Professor, University of Arkansas School of Law. The author would like to
thank the University of Arkansas School of Law for the generous grant provided for this
paper.
1. Consultation Report, Int’l Org. of Sec. Comm’ns, Financial Benchmarks: Onnig
H. Dombalagian, Chasing the Tape: Information Law and Policy In Capital Markets (89
(2015) CR01/13, January 2013, at Annex A, p. 48),
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD399.pdf.234 HASTINGS BUSINESS LAW JOURNAL 17:2
benchmarks. Major financial market benchmarks set prices in those
markets and, hence, exert significant market power. While financial
benchmark abuse through manipulation undermines market
integrity, it is important to understand that financial benchmarks do
serve important functions in financial markets provided they are not
manipulated.
Financial benchmarks are important for setting price in financial
markets because, when properly applied, they reduce costs and risks
thus enhancing efficiency. As discussed in section II, it would be
impossible to quickly determine the real market price for many
financial products due to the vast size and complexity of many of
these markets. Accordingly, this article does not argue for the
elimination of financial benchmarks, but rather a more aggressive use
of existing antitrust laws to provide a sufficient negative incentive to
financial benchmark manipulation.
Even if financial benchmarks are free from manipulation, it is
important to understand that financial benchmarks are not objective;
there is a fallible human factor involved. This is important because
we should not be led to believe that financial benchmarks impart
information using an infallible mathematical methodology based
purely on impartial data. As discussed in section III, the human
factor can intercede at various stages in the production of financial
benchmarks. Unregulated or underregulated financial benchmarks
allows for increased human error and manipulation at the data input
stage, the administrator stage and the end user stage.
To further explain the human factor in financial benchmark
production, section IV discusses how financial benchmarks are
calculated using examples from the electricity market, the financial
benchmark for interest rates, the foreign exchange market, the
derivative swaps market and the brent crude oil market. These
examples are used in this paper because they involve financial
benchmarks that were manipulated resulting in antitrust litigation
which have provided us with several important case studies.
Having explained how financial benchmarks work, section V
establishes that financial benchmarks determine price in many
markets. Financial benchmarks are ubiquitous in setting prices in
financial markets. This is the economic reality of these markets, in
part, because of legal requirements that financial benchmarks be
used, regulatory requirements that financial benchmarks be used and
adhesion contracts that incorporate financial benchmarks.2021 FINANCIAL BENCHMARK CONTROL 235
Accordingly, prices in these markets are controlled by financial
benchmarks.
This price control factor is critical because the ability to control
price is one of the necessary elements to establish monopolization
under the Sherman Act, §2. Section VI explains monopolization as
having two critical elements; 1. Monopoly power which is the ability
to control prices or eliminate competitors and 2. The conduct prong
which has been described as anticompetitive conduct. Financial
benchmark monopolization cases are examined here to illustrate how
control of the financial benchmark equals the ability to control prices
and how financial benchmark manipulation establishes a violation of
the conduct prong.
Finally, section VII examines some of the financial benchmark
reforms, with a particular focus on interest rate benchmarks. The
purpose here is to illustrate how, even with reforms, the human factor
will be ever present in financial benchmarks.
II. WHY FINANCIAL BENCHMARKS ARE IMPORTANT
Financial markets2 are enormous consisting of investments in the
trillions of dollars.3 The buying and selling of these investment
vehicles, of necessity, requires the establishment of prices. But how
does one efficiently establish “price” in such large markets? Fair
market value has, since ancient times, been considered a just price
most buyers and sellers would agree to.4 But it would be impractical
to attempt to establish a fair market price in such “vast and complex”
markets.5 Enter financial benchmarks, a pricing mechanism that looks
at data from a sample of the market in question and applies that data
to a mathematical formula to calculate an estimated “fair market”
price.
2. Adam Hayes, Financial Markets, INVESTOPDIA (Feb. 23, 2021),
https://www.investopedia.com/terms/f/financial-
market.asp#:~:text=Financial%20markets%20refer%20broadly%20to,smooth%20operati
on%20of%20capitalist%20economies (In this paper, financial markets refer broadly to any
marketplace where the trading of securities occurs, including the stock market, bond
market, commodities market, forex market, and derivatives market, among others.).
3. Gina-Gail S. Fletcher, Benchmark Regulation, 102 IOWA L. REV. 1929, 1930-31 (2017).
4. Alphonse M. Squillante, The Doctrine of Just Price-Its Origin and Development,
74 COM L.J., (Nov. 1969), 333 (citing to ARISTOTLE’S ETHICS, (Penguin Classics edition),
261).
5. Andrew Verstein, Benchmark Manipulation, 56 B.C. L. REV. 215, 217 (2015).236 HASTINGS BUSINESS LAW JOURNAL 17:2
Financial benchmarks are important to financial markets because
they reduce transaction costs as parties do not have to compile their
own price data,6 increase the disbursement of information,7 and
enhance market transparency and liquidity.8 These benefits reduce
barriers to entry, simplify transactions and increase efficiency. 9
Today, the economic reality is that actual fair market prices are
irrelevant in many markets; benchmarks determine price.10
III. THE HUMAN FACTOR - BENCHMARKS ARE NOT
OBJECTIVE
Similar to the myth of the “rational man,” benchmarks persist in
a mythical world of objective mathematical data.11 Before the 2012
revelation of benchmark manipulation, the subjective, human
elements, including avarice, have been ignored leaving benchmarks
to exist in an unregulated environment.12
While benchmarks may be calculated using different
methodologies, discussed in more detail below, all benchmarks have
three key actors: input providers, benchmark administrators and end
users.13 Each of these actors rely as much, if not more, on human
factors rather than a pure, mathematical factor. For example, input
providers provide the data upon which the benchmark is based. The
greater the number of input providers, the more accurate the
benchmark and the less likely the benchmark can be manipulated.14
But data input is not a simple bean-count; as with all data-based
information bad data results in bad information – garbage-in,
6. Fletcher, supra note 3, at 1943-44; Verstein supra note 5 at 225-27; Gabriel
Rauterberg, Andrew Verstein, Index Theory: The Law, Promise and Failure of Financial Indices,
30 YALE J. ON REG. 1, 13, 14 (2013).
7. Rauterberg, supra note 6, at 13; Fletcher supra note 3, at 1943-44; Verstein supra
note 5, at 225-26; Vincent Brousseau et al., The LIBOR Scandal: What’s Next? A Possible Way
Forward, VOX (Dec. 9, 2013), http://www.voxeu.org/article/libor-scandal-and-reform.
8. Fletcher, supra note 3, at 1943-44; Rauterberg, supra note 6, at 13.
9. Fletcher, supra note 3, at 1944; Rauterberg, supra note 6, at 14.
10. Verstein, supra note 5, at 217; Fletcher, supra note 3, at 1943.
11. Rauterberg, supra note 6, at 15.
12. Fletcher, supra note 3, at 1933; Rauterberg, supra note 6, at 3.
13. Fletcher, supra note 3, at 1945.
14. Id.; see also Consultation Report, Int’l Org. of Sec. Comm’ns, Financial
Benchmarks: Onnig H. Dombalagian, Chasing the Tape: Information Law and Policy In
Capital Markets (89 (2015) CR01/13, January 2013, at Annex A, p. 12),
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD399.pdf.2021 FINANCIAL BENCHMARK CONTROL 237
garbage-out.15 For example, the data that used to be submitted to
calculate LIBOR16 was based upon input providers’ “estimates.” This
data source was not purely mathematical, and in turn, it allowed for
significant discretion as well as manipulation.17
To some extent, benchmarks are compiled based upon decision
theory:18 selecting segments of data because using the entire universe
of data is not practical primarily due to costs. This requires some
subjective intervention.19 For example, Platts provides oil price data
based upon actual transactions. However, Platts does not contact
every buyer and seller of oil. Rather, it uses a market sample selecting
who to contact, how to weigh the data, and estimates when data is
not available. Such data input is inherently subjective.20
There are two types of benchmark administrators: private
service benchmark administrators who provide output date to clients
who subscribe to their service and secondary business sources such
as exchanges and trade organizations. 21 In both instances,
benchmark administrators select data sources, gather the data from
input providers, determine weights to be assigned to data inputs,
calculate the data inputs and disseminate the resulting outputs
(benchmark price) to end users.22 As with data input, this selection of
data process together with weighting considerations and
methodologies require some subjective human input.
End users are parties who need the information to reduce
transaction costs. In the financial services sector, this would include
large actors in financial markets such as banks, insurance companies,
15. TechTarget Contributor, Definition garbage in, garbage out (GIGO),
SEARCHSOFTWARE QUALITY (2008),
https://searchsoftwarequality.techtarget.com/definition/garbage-in-garbage-out
(George Fuechsel, an early computer programmer and instructor, is believed to have
coined the term as a visual tool in teaching his students that a computer just processes
what it is given.).
16. London Inter-bank Offered Rate.
17. Rauterberg, supra note 6, at 17.
18. See Herbert A. Simon, Theories of Decision-Making in Economics and Behavioral
Science, 49(3) THE AMERICAN ECON. REV. 253, 272-73 (June, 1959) (In this paper, decision
theory is meant to describe the use of selective information when using all possible
information would be impracticable.).
19. Rauterberg, supra note 6, at 18-19.
20. Id. at 24.
21. Fletcher, supra note 3, at 1946.
22. Fletcher, supra note 3, at 1946; Consultation Report, Int’l Org. of Sec. Comm’ns,
Financial Benchmarks: Onnig H. Dombalagian, Chasing the Tape: Information Law and
Policy In Capital Markets (89 (2015) CR01/13, January 2013, at Annex A, p. 15),
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD399.pdf.238 HASTINGS BUSINESS LAW JOURNAL 17:2
and hedge funds.23 Such end users reduce pricing transaction costs
by referencing price to a benchmark rather than trying to set price on
actual market prices; a costly endeavor.
Price benchmarks are generally easier to manipulate than the
prices they represent. Two factors—concentration and
voluntariness—greatly influence the potential for bias. Concentration
reflects the fact that benchmark data is only a slice of all available data
for that particular benchmark.24 As discussed above regarding the oil
benchmark, Platts, only a small percentage of actual transactions are
used as the data input. Accordingly, the data input is concentrated.
This is referred to as domain concentration where the input providers
are limited to a small number. If there are only a few buyers and
sellers in a market, this is referred to as participant concentration.
Finally, liquidity concentration occurs when there are few trades
within a market. Participant and liquidity concentration are related
to the end user actors. All three forms of concentration can skew the
benchmark to the point where we are not receiving information about
market prices, but instead, we are receiving a benchmark price which
may have very little to do with a free-market price.25
While the above description of benchmarks identifies three
separate actors, it is often the case that the input providers and the
end users are the same party.26 For example, in the LIBOR
benchmark, input providers and end users were banks who needed
the benchmark to set the price for interest rates.27 To further add to
the conflict of interest, the benchmark administrator for LIBOR was
the BBA, a banking trade association.28
IV. HOW BENCHMARKS ARE CALCULATED
Benchmarks use a variety of input mechanisms and
mathematical formulas to determine a price or a rate for underlying
assets.29 This section examines the various mechanisms used to create
23. Fletcher, supra note 3, at 1945.
24. Andrew Verstein, Benchmark Manipulation, 56 B.C. L. REV. 215, 218 (2015).
25. Id. at 230-31.
26. Fletcher, supra note 3, at 1945.
27. Sharon E. Foster, LIBOR Manipulation and Antitrust Allegations, 11 DEPAUL BUS. &
COM. L.J. 291, 296-97 (2013).
28. Foster, supra note 27, at 296-97; Fletcher, supra note 26, at 1945, 1960.
29. Fletcher, supra note 3 at 1930-31, 1945-46; Regulation (EU) No 596/2014 of the
European Parliament and of the Council of 16 April 2014 on Market Abuse [Market Abuse
Regulation], L 173/1 OJ 12.06.2014, recital (29); Gabriel Rauterberg & Andrew Verstein,2021 FINANCIAL BENCHMARK CONTROL 239
a pricing benchmark in the electricity market, interest rates, the
foreign exchange market, the derivative swaps market, and the brent
crude oil market. Each of these markets have experienced benchmark
manipulation indicating that various benchmark calculations have
vulnerabilities.
A. BENCHMARK CALCULATION IN THE ELECTRICITY MARKET
In the Merced30 case, the California electricity price benchmark
was calculated as follows:
“A. THE ELECTRICITY MARKET
. . . Merced purchased peak electricity from another
California irrigation district during the Class Period. Those
contracts settled according to the Dow Jones Daily Index
price for peak power at the northern California trading hub
known as North Path 15, which is set by averaging market
prices for electricity-related contracts at North Path 15. . ..
Two types of electricity-related contracts are relevant
to this case: contracts for next-day delivery of physical
electricity, or “dailies,” and financial “swap” contracts by
which parties agree to exchange payments depending on the
daily index price on a specified settlement date at a specified
location. The prices at which dailies and swap contracts
settle are based on the index price published by certain
exchanges.
Those exchanges calculate index prices based on
transactions for electricity at specific trading locations. One
of these exchanges is the Intercontinental Exchange
(“ICE”), which calculates a Daily Index price based on the
weighted average price of all day-ahead fixed-price physical
electricity transactions at the relevant location. Dow Jones
also calculates prices based on the same dates and trading
hub locations, which Merced alleges move in lockstep with
the ICE Daily Index price (collectively with the ICE Daily
Index price, the “Daily Index Prices”). Market participants
Index Theory: The Law, Promise and Failure of Financial Indices, 30 YALE J. ON REG. 1, 17-24
(2013).
30. Merced Irrigation District v. Barclays Bank PLC, 165 F.Supp.3d 122 (S.D.N.Y.,
2016).240 HASTINGS BUSINESS LAW JOURNAL 17:2
trading in physical positions have the obligation to deliver
or receive electricity at the Daily Index Prices, while those
trading in purely financial positions, including swap
contracts, have no obligation to deliver or receive physical
electricity.
Although Barclays did not have the capability to
provide or accept physical electricity, during the Class
Period it traded both short-term contracts for physical
electricity—which it then “flattened,” or offset, by
purchasing or selling physical contracts for an equal volume
of electricity in the opposite direction prior to delivery—and
longer-term swap contracts that settled at prices set by the
ICE Daily Index . . ..31
The electricity market in Merced was priced based upon a
benchmark known as the Dow Jones Daily Index for a particular
geographic location, North Path 15. Dow Jones Daily Index, in turn,
calculates its index from input date received from various trading
exchanges such as the Intercontinental Exchange (“ICE”). ICE uses a
weighted average price method to calculate price based upon actual
transaction for a specific location. Data is taken from actual
transactions on the ICE trading platform from trades by ICE
members. So, the administrator and the data input providers are, in
essence, the same.32 Further, the data input providers are the very
people who become the end users.
B. BENCHMARK CALCULATION FOR INTEREST RATES
Regarding the LIBOR interest rate index, prior to 2012 the
benchmarks were calculated as follows:
[T]he British Bankers Association, which administered LIBOR
from its inception and through the relevant time period, would have
participating banks submit data in response to this question, “At
what rate could you borrow funds, were you to do so by asking for
and then accepting inter-bank offers in a reasonable market size just
prior to 11 am?” The rates are calculated by participating banks
submitting data on a daily basis reflecting their estimated cost of
31. Id. at 128-29.
32. Wholesale Electricity and Natural Gas Market Data (June 18, 2020),
https://www.eia.gov/electricity/wholesale/.2021 FINANCIAL BENCHMARK CONTROL 241
money for fifteen different time periods; overnight loans up to
twelve-month loans. Participating banks are on panels consisting of
six to eighteen banks with some banks on more than one panel. There
are a total of ten panels; one for each of the ten major currencies
included in the LIBOR calculations.
Banks are selected as participating banks on the panels based
upon reputation, credit quality, and activity in London, as London is
a major international financial market. The data provided by
participating banks on a specific panel is then “trimmed” with the
highest and lowest 25% rates eliminated, and the median rates used.
For example, the U.S. Dollar LIBOR panel is comprised of eighteen
participating banks which would submit data each day on each of the
fifteen time periods. Looking at just one of those time periods for
purposes of this example, say the overnight rate, of the eighteen data
submissions, the high four and the low four would be eliminated with
the middle remaining ten used to calculate the overnight interest rate
for the U.S. Dollar LIBOR.33
LIBOR is supposed to reflect the cost of money over various time
periods. It was based upon estimates provided by a limited number
of banks (data input providers) who were also end users. The
administrator was a banking trade association.
C. BENCHMARK CALCULATION IN THE FOREIGN EXCHANGE MARKET
As for the foreign exchange market, the benchmarks were
calculated as follows:
The FOREX case involved the manipulation of foreign exchange
(FX) benchmark rates. FX benchmark rates are used to price certain
foreign exchange financial transactions including foreign exchange
swaps, cross currency swaps, spot transactions, futures, options,
forwards and other derivatives. In general, FX benchmark rates are
set based upon actual trades (bids and offers during the “fix period”
(a one-minute window). The benchmark rate is determined by
calculating the bid-offer spread based upon the fix period
information and calculating a median which determines the rate.34
Unlike LIBOR, foreign exchange data input was based upon
actual trades, but only during a short time period. This data was
33. Foster, supra note 27, at 296-96.
34. Sharon E. Foster, Antitrust Efficient Enforcer and the Financial Products Benchmark
Manipulation Litigation, 13 OHIO ST. BUS.L.J. 99, 144-45 (2019).242 HASTINGS BUSINESS LAW JOURNAL 17:2
manipulated by not submitting trades during the fix period or
submitting as many trades as possible during the fix period. The data
input providers and end users were the same people.
D. BENCHMARK CALCULATION IN THE DERIVATIVE SWAPS MARKET
An interest rate benchmark for swaps known as the ISDAfix was
calculated as follows:
The ISDAfix is an interest rate benchmark, issued in several
currencies, used to price interest rate swaps. For example, one party
may hold a financial instrument with a fixed interest rate while
another party holds a financial instrument with a floating interest
rate. These parties may enter into an agreement to swap
fixed/floating interest rates. A “swaption,” is an option to enter into
an interest rate swap at a specified rate on some set future date. The
ISDAfix is the benchmark used to price these interest rate swaps.
USD ISDAfix rates and spreads are U.S. Dollar-denominated
swaps for various maturity dates. The 11:00 a.m. USD rate is used for
cash settlement of swaps and swaptions. The USD ISDAfix rate was
set by a process that began at 11:00 am Eastern Time by capturing
swap rates and spreads from U.S. based Swap Brokers. ICAP Plc,
responsible for compiling ISDAfix benchmark rates data during the
relevant time period, would circulate to a panel of banks and financial
institutions (collectively “banks”) a set of reference points generated
using the captured data and data reflecting executed trades and
executable bids and offers at 11:00 am for US Treasury securities.
ICAP requested the banks to submit the midpoint of where it would
offer and bid a swap to a dealer. Banks could accept the reference rate
provided at 11:02 a.m., submit a different value, or take no action.
Thomson Reuters would then average the submissions resulting in
the USD ISDAfix.35
The USD ISDAfix price sought data input from end users during
a brief time period, from a limited number of data input providers
who could provide data not based on actual market conditions and
then accept, reject or take no action based on that data which was then
averaged by the administrator.
E. BENCHMARK CALCULATION IN THE BRENT CRUDE OIL MARKET
35. Id. at 148.2021 FINANCIAL BENCHMARK CONTROL 243
Benchmark calculation for the Brent Crude Oil index is as
follows:
The cash settlement price for the ICE Brent Future is based on the
ICE Brent Index (‘The Index’) on expiry day for the relevant ICE Brent
Futures contract month. The Index represents the average price of
trading in the BFOE (Brent-Forties-Oseberg-Ekofisk-Troll) cash or
forward (‘BFOE Cash’) market in the relevant delivery month as
reported and confirmed by the industry media. Only published cargo
size (600,000 barrels) trades and assessments are taken into
consideration in the calculation.
i. Calculation
The calculation of the ICE Brent Index will be the average of five
values. These will be aggregated into a single figure for the final ICE
Brent Index figure from the five standalone valuations at each of the
sampling points.
Each of those five figures will be calculated by averaging the sum
of:
1) The volume weighted minute marker for the second month
ICE Brent Futures contract at the sampling time; and the sum of a
weighted average of full cargo second month EFP trades and a
weighted average of full cargo spread trades (between first and
second months) in the Cash BFOE market, in the 30-minute period
concluding at the sampling point in question; and
2) that same volume weighted minute marker to the sum of the
straight averages of the independent assessment(s) specified in the
Index methodology for the second month EFP value and the spread
between the first and second month Cash BFOE markets at the
sampling point; and
3) a weighted average of any full cargo first month Cash BFOE
trades (if any) in the 5-minute period concluding at the sampling
point in question.
Should trades occur in only one of the component markets of
section 1 above, the missing trade- derived value will be replaced in
the calculation above by an independent assessment of that
component market at that time, but only where no trade in that
component market has occurred.
Should trades occur in neither component market during the 30-
minute period in question, then the value for that sampling time will244 HASTINGS BUSINESS LAW JOURNAL 17:2
be calculated as per paragraphs 2 and 3 only, i.e., on the basis of
independent assessments and any full cash cargoes only.
Should no trades occur in component market 3, then the value
for that sampling time will be calculated as per paragraph 1 and 2
only, i.e. on the basis of independent assessments and/or any EFP
and/or spread trade only.
ii. Volume Weighted Second Month Minute Markers
Tradable minute markers will exist for the second month ICE
Brent Crude Futures contract at the following sampling times: 10:30,
12:30, 14:30, 16:30 and 19:30. Two of the second month minute
markers already exist, which are calculated at 16:30 (the ‘tradable ICE
Brent London Minute Marker’) and 19:30 (settlement). Please note,
the 19:30 marker is a two-minute marker.
iii. Full Cargo Second Month Efp Trades And Full Cargo Spread
Trades (Between First And Second Months)
For inclusion in the Index calculation, the full cargo EFP must be
traded in the 30 minutes before the sample time, so 10:00:00 to
10:29:59 for the 10:30 sampling point, 12:00:00 to 12:29:59 for the 12:30
sampling point and so forth. If the cargo trades any time after 10:30
or 12:30 and so forth, it will not be included in the Index calculation.
If the trade appears to be close to the cut-off, the Exchange will reach
out to participants on one or both sides, and/or to brokers to clarify
when the trade actually occurred.
iv. Independent Assessments
ICIS assess the M2 EFP and M1/M2 Cash BFOE Spread at 10:30,
12:30, 14:30, 16:30 and 19:30 on expiry day. These independent
assessments of the M2 EFP and M1/M2 Cash BFOE Spread are used
in the calculation of the Brent Index.
v. First Month Cash Bfoe Trades
To be included in the Brent Index, full cargo front month cargo
trades must happen within 5 minutes of the cut-off time. These are at:2021 FINANCIAL BENCHMARK CONTROL 245
10:25:00 to 10:29:59, 12:25:00 to 12:29:59, 14:25:00 to 14:29:59, 16:25:00
to 16:29:59 and 19:25:00 to 19:29:59.36
What is clear from the rather complex methodology used to
calculate the brent oil benchmark is that it is an average of five values.
These five values represent the data input looking at volume during
a two-month time period, price during a thirty-minute time period
and a weighted average during a five-minute time period. When data
is missing, independent assessment is used in lieu of actual market
data. With the exception of the independent assessment, data input
providers and end users are the same.
V. BENCHMARKS DETERMINE PRICE
It has been argued that even with benchmarks one can negotiate
price.37 If one can negotiate price, it is not likely that a party has
control of price. However, this theoretical possibility is not a realistic
probability as most markets are priced by benchmarks.38 Indeed, not
only are financial benchmarks used in most contracts to price
financial products,39 they are required under accounting standards
and regulations for disclosure requirements.40 Thus, it seems unlikely
36. ICE Futures Europe, The ICE Brent Index (date, time),
https://www.theice.com/publicdocs/futures/ICE_Futures_Europe_Brent_Index.pdf.
37. See Gelboim v. Bank of America, 823 F.3d 759, 773 (2nd Cir. 2016).
38. Verstein, supra note 24, at 224-25.
39. Matthew C. Turk, Regulation by Settlement, 66 U. KAN. L.R. 259, 284 (2017).
40. Fair Value Measurement topic 820 FASB: Ernst & Young, Financial reporting
developments A comprehensive guide, Fair value measurement (Revised July 2019)
https://www.ey.com/publication/vwluassetsdld/financialreportingdevelopments_bb1
462_fairvaluemeasurement_25july2019-
v2/$file/financialreportingdevelopments_bb1462_fairvaluemeasurement_25july2019-
v2.pdf (last visited ...) ; Financial Accounting Standards Board, Proposed Accounting
Standards Update: Financial Instruments—Credit Losses (Topic 326), Derivatives and
Hedging (Topic 815), and Leases (Topic 842),
https://www.fasb.org/cs/ContentServer?c=FASBContent_C&cid=1176173177588&d=&
pagename=FASB%2FFASBContent_C%2FGeneralContentDisplay (last visited…);
Warren Gorham & Lamont, FASB Updates List of Permissible U.S. Benchmark Interest
Rates for Hedge Accounting, Bank Auditing and Accounting Report (November 2018),
2018 WL 6444909; ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the
Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a
Benchmark Interest Rate for Hedge Accounting Purposes; 17 C.F.R. § 229.1111; Fletcher,
supra note 26, at 1943; Warren Gorham & Lamont International Accounting and Financial
Reporting, and Analysis, WGL INTLACCT B25; Harold S. Bloomenthal & Samuel Wolff,
Securities Law Handbook | June 2020 Update, Chapter 3. The Integrated Disclosure System,
Part II. Regulation S-K, D. Other Disclosures, § 3:78. The LIBOR transition.246 HASTINGS BUSINESS LAW JOURNAL 17:2
that one could negotiate price if the financial benchmark was
required for accounting and regulatory purposes.
Pricing benchmarks have become “the de facto pricing
mechanism for many markets.”41
Given risk factors and costs in trying to incorporate “real”
market prices, for regulatory purposes such as accounting standards
or into financial product contracts pricing benchmarks have become
ubiquitous as pricing terms.42
A. LEGAL AND REGULATORY REQUIREMENTS TO USE BENCHMARKS
There are numerous instances where the use of pricing
benchmarks are legally required. As one scholar noted:
The law often imposes benchmarks upon private
actors, publicly endorsing private hardwiring. It is
common for regulations to require private actors to
use benchmarks. For example, exchange traded funds
obtain broad exemptions from the regulations
applicable to mutual funds, provided that they are
based upon a third-party benchmark; . . . ; ERISA
conditions the ability of fiduciaries to self-deal in
currency trades for the retirement plans they
supervise on limiting their prices by the relevant
benchmark; federal law requires natural gas prices to
be “fair and reasonable,” but prices linked to a market
benchmark are presumptively valid.43
To add to the above list, the Financial Accounting Standards
Board (“FASB”) promulgates accounting standards considered
41. John B. Kirkwood, Market Power and Antitrust Enforcement, 98 B.U. L. REV. 1169,
1178-79; 1181-85 (2018); Fletcher, supra note 3, at 1930, 1943-44; Matthew C. Turk,
Regulation by Settlement, 66 U. KAN. L.R. 259, 284 (2017); Regulation (EU) No 596/2014 of
the European Parliament and of the Council of 16 April 2014 on Market Abuse [Market
Abuse Regulation or ‘MAR’], L 173/1 OJ 12.06.2014, recital (29); Verstein, supra note 24, at
217, 236; Vincent Brousseau et al., The LIBOR Scandal: What’s Next? A Possible Way Forward,
VOX (Dec. 9, 2013), http://www.voxeu.org/article/libor-scandal-and-reform.
42. Verstein, supra note 24, at 224-25.
43. Id. at 227-28; see Reforming Major Interest Rate Benchmarks, Progress Report (18
December 2019), p. 41, https://www.fsb.org/wp-content/uploads/P181219.pdf
(discussing the OSSG working to ease the transition from LIBOR to SOFR taking into
account regulatory issues where benchmarks are required).2021 FINANCIAL BENCHMARK CONTROL 247
authoritative by state and national accounting regulators such as the
American Institute of CPAs (AICPA).44 The FASB defines benchmark
interest rates as:
Benchmark Interest Rate
A widely recognized and quoted rate in an active
financial market that is broadly indicative of the overall level
of interest rates attributable to high-credit-quality obligors
in that market. It is a rate that is widely used in a given
financial market as an underlying basis for determining the
interest rates of individual financial instruments and
commonly referenced in interest-rate-related transactions.
In theory, the benchmark interest rate should be a risk-
free rate (that is, has no risk of default). In some markets,
government borrowing rates may serve as a benchmark. In
other markets, the benchmark interest rate may be an
interbank offered rate.45
This definition sets interest rate prices by defining interest rates
based upon a benchmark. Additionally, a list of approved interest
rate benchmarks is provided by FASB.46 Further, the capital asset
pricing model (“CAPM”), an accounting model used to price risky
securities, incorporates “risk-free rates” which include the proposed
benchmark SOFR and LIBOR (a risk-free proxy rate).47
Further, the Securities and Exchange Commission requires “a
consistent comparison of composites to appropriate benchmarks” for
44. FASB Updates List of Permissible U.S. Benchmark Interest Rates for Hedge
Accounting (last visited Oct. 25, 2018),
https://www.fasb.org/jsp/FASB/FASBContent_C/NewsPage&cid=1176171490795.
45. FASB Accounting Standards Update, Derivatives and Hedging (Topic 815):
Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as
a Benchmark Interest Rate for Hedge Accounting Purposes, No. 2018-16 (Oct. 2018),
https://asc.fasb.org/imageRoot/47/118700447.pdf.
46. FASB Updates List of Permissible U.S. Benchmark Interest Rates for Hedge
Accounting (Oct. 25, 2018),
https://www.fasb.org/jsp/FASB/FASBContent_C/NewsPage&cid=1176171490795.
47. Andreas Schrimpf & Vladyslav Sushko, Beyond LIBOR: A Primer on the New
Benchmark Rates, BIS Q. REV. 29, 30 (Mar. 5, 2019),
https://www.bis.org/publ/qtrpdf/r_qt1903e.htm; Will Kenton, Capital Asset Pricing
Model (CAPM), INVESTOPEDIA (Apr. 1, 2021),
https://www.investopedia.com/terms/c/capm.asp; Adam Hayes, LIBOR Curve,
INVESTOPEDIA (Dec. 5, 2020), https://www.investopedia.com/terms/l/libor-
curve.asp#:~:text=The%20LIBOR%20curve%20and%20the,short%2Dterm%20floating%2
0rate%20instruments.248 HASTINGS BUSINESS LAW JOURNAL 17:2
performance advertising.48 The New York Federal Reserve has
established the Alternative Reference Rate Committee (“ARRC”) to
ease the transition from LIBOR to SOFR because the LIBOR
benchmark is widely used and legally required relating to financial
market accounting requirements and tax issues.49
B. CONTRACTS INCORPORATING BENCHMARKS AS PRICE INPUTS
Given the previously noted risk factors and costs in attempting
to price based upon the “real” market price together with legal and
regulatory requirements to use benchmarks, benchmarks have
become a common pricing term in many financial products
contracts.50 While, theoretically some parties may have some choice
about pricing terms, as a practical reality there is little to no choice
due to legal requirements to use certain benchmarks as discussed
above and contract of adhesion issues discussed below. The result is
that the benchmark incorporated in the contract constitutes price.51
Perhaps the most concerning aspect regarding benchmark
manipulation is the impact it had on retirement investment funds as
these retirement accounts are largely an adhesion contract which
reference a benchmark for price.52 An adhesion contract is generally
defined as:
Contracts of adhesion are characterized by standardized forms
prepared by one party which are offered for rejection or acceptance
without opportunity for bargaining and under the circumstances that
the second party cannot obtain the desired product or service except
by acquiescing in the form agreement.53
A typical retirement plan, such as a 401k, allows employees to
contribute to an employer-determined set of assets which may
48. See SEC Compliance Alert (June 2007),
https://www.sec.gov/about/offices/ocie/complialert.htm.
49. Reforming Major Interest Rate Benchmarks, Progress Report, 43-44 (Dec. 18,
2019), https://www.fsb.org/wp-content/uploads/P181219.pdf.
50. Verstein, supra note 24, at 226.
51. Verstein, supra note 24, at 228; Rauterberg & Verstein, supra note 29, at 9-11.
52. Verstein, supra note 24, at 236.
53. Rory v. Continental Ins. Co., 473, Mich. 457, 484 (2005) (citing to Morris v.
Metriyakool,
418 Mich. 423 (1984); Patterson v. ITT Consumer Financial Corp., 14 Cal. App. 1659, 1664
(1993); Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 HARV. L.
REV. 1173, 1177 (1983); Kenneth R. Davis, The Arbitration Claws: Unconscionability In The
Securities Industry, 78 BOST. U. L. REV. 255, 284-85 (1998).2021 FINANCIAL BENCHMARK CONTROL 249
include mutual funds, bonds, stocks and real estate investment
trusts.54 Accordingly, the employee has no choice as to what funds
are in the plan, the employer does. The employee does get to direct
her contributions to specific funds within the plan. Critically, 401k
plans and IRAs are considered ERISA plans which are deemed to be
adhesion contracts.55
Financial products, such as mutual funds, are a primary
investment instrument included in retirement accounts, such as the
401k retirement accounts or IRAs. These retirement vehicles account
for a significant portion of U.S. financial markets. For example:
Employer-sponsored retirement plans (DB [Defined Benefit
plans such as pensions] and DC plans [Defined Contribution plans
such as 401(k) and 403(b) plans] sponsored by private-sector and
government employers), IRAs (including rollovers), and annuities
play an important role in the US retirement system, with assets
totaling $27.1 trillion at year-end 2018 . . . down 4.7 percent from year-
end 2017, but in line with the 5.3 percent decline in US stocks during
the year. The largest components of retirement assets were IRAs and
employer-sponsored DC plans, which together represented 60
percent of all retirement market assets at year-end 2018. Other
employer-sponsored plans include private-sector DB pension plans
($2.9 trillion), state and local government DB retirement plans ($3.9
trillion), and federal government DB plans ($1.8 trillion) . . ..56
Many US households have accumulated resources earmarked
for retirement . . .. Across all age groups, 62 percent of US households
(79 million) reported that they had employer-sponsored retirement
plans, IRAs, or both in 2018. Fifty-six percent of US households
reported that they had employer-sponsored retirement plans—that
is, they had assets in DC plan accounts, were receiving or expecting
to receive benefits from DB plans, or both. Thirty-three percent
reported having assets in IRAs, including 27 percent who had both
IRAs and employer-sponsored retirement plans. US households
represent a wide range of ages at different points in the life cycle of
54. Joshua Kennon, Investing Through Your 401(k): A Beginner’s Guide to the Different
Types of 401(k) Plans, THE BALANCE (Feb. 9, 2021),
https://www.thebalance.com/investing-through-your-401-k-357109.
55. Kate Watson Moss, ERISA and Arbitration: How Safe Is Your 401(k)?, 64 DEPAUL L.
REV. 773, 780-81 and fn 68, 804 and fn 264 (2015); 29 U.S.C. Chapt. 18 Employee Retirement
Income Security Act (ERISA), https://via.library.depaul.edu/law-
review/vol64/iss2/22.
56. 2019 Investment Company Handbook: A Review of Trends and Activities in the
Investment Company Industry, 158, https://www.ici.org/pdf/2019_factbook.pdf.250 HASTINGS BUSINESS LAW JOURNAL 17:2
savings. Focus on retirement savings tends to increase with age . . .,
and older households are more likely to have retirement resources;
for example, about eight out of 10 near-retiree households have
retirement accumulations . . ..57
Retirement plans contain trillions of dollars which retirees and
soon to be retirees depend upon for their retirement. Social Security
is not intended to and does not pay enough to live on. Further, it is
anyone’s guess if Social Security will be available in the not-too-
distant future.
The above-described retirement plans are contracts of adhesion
where the investor has limited options regarding the investment
vehicles, limited options regarding the amount of contribution and
no choice regarding pricing benchmarks. Even if negotiations for
pricing benchmarks were possible for retirement accounts, it is
doubtful that individual investors would have the time to spend
researching such things as pricing benchmarks in order to make an
informed choice for purposes of negotiations. Indeed, it would
probably be terribly inefficient to institute such individual
negotiations. That said, it is specious to suggest that such choice is
available.
VI. MONOPOLIZATION
Pricing benchmarks are, as a matter of economic reality, price in
most financial markets. Control a pricing benchmark for a market
often means control of price for that market. If the pricing benchmark
has few input providers or is otherwise concentrated, uses a
methodology that is easily manipulated or utilizes input providers,
administrators and/or end users with conflicts of interest there is a
high risk the pricing benchmark will be manipulated for
anticompetitive purposes. Such control and manipulation may also
be monopolization; an antitrust violation.
The primary statute dealing with monopolization is the Sherman
Act, 15 U.S.C. §2 which states, in pertinent part:
Every person who shall monopolize, or attempt to monopolize,
or combine or conspire with any other person or persons, to
monopolize any part of the trade or commerce among the several
57. Id. at 159.2021 FINANCIAL BENCHMARK CONTROL 251
States, or with foreign nations, shall be deemed guilty of a felony, . .
..58
The Supreme Court has articulated a two-prong test to establish
a Sherman Act §2 claim of monopolization: “(1) the possession of
monopoly power in the relevant market and (2) the willful acquisition
or maintenance of that power as distinguished from growth or
development as a consequence of a superior product, business
acumen, or historic accident.”59
The first prong of the Sherman Act §2 test is “monopoly power,”
which the Supreme Court has defined as “the power to control prices
or exclude competition.”60 Additionally, the Supreme Court has held
that such price control must be of a sufficient duration to avoid
interfering in a market that will self-correct.61 The second prong of
Sherman §2, “willful acquisition or maintenance of that power” is the
conduct prong and examines what defendants allegedly did to
monopolize or attempt to monopolize. This prong primarily seeks to
identify exclusionary, predatory or anticompetitive conduct that
violates the conduct prong.62 For example, below-cost prices that
drive rivals out of the market and allow the monopolist to raise its
prices later and recoup its losses; limited circumstances in which a
firm’s unilateral refusal to deal with its rivals can give rise to antitrust
liability; tying arrangements where a firm requires a customer to
purchase a tied product in order to purchase the tying product;
fraudulent patent procurement; acquisition of competitors; and
restrictive agreements.63 These examples are illustrative and do not
58. 15 U.S.C. §2.
59. United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966); Brunswick Corp v.
Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977) (In a civil Sherman §2 claim must also
establish damages of the type antitrust law was intended to address, but damage issues
are not discussed in this article.).
60. United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956).
61. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 589-90 (1986).
62. Pac. Bell Tel. Co. v. Linkline, 129 S. Ct. 1109, 1120 (2009); Brooke Group Ltd. v.
Brown & Williamson Tobacco Corp., 509 U.S. 209, 223 (1993); Aspen Skiing Co. v. Aspen
Highlands Skiing Corp., 472 U.S. 585, 602-03 (1985); Atl. Richfield Co. v. USA Petroleum
Co., 495 U.S. 328, 340 (1990).
63. Pac. Bell Tel., 129 S. Ct. at 1118 (citing Brooke Group, Ltd., 509 U.S. at 222-24 and
Aspen Skiing Co., 472 U.S. at 608-11); Eastman Kodak Co. v. Image Technical Servs., Inc.,
504 U.S. 451, 482-83 (1992) (holding that the issue of whether Kodak engaged in
monopolistic behavior when it limited private-service companies’ access to replacement
parts turned on whether Kodak had valid business justifications for its activity); Walker
Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177-78 (1965) (concerning
allegations that a company misrepresented facts in an attempt to gain a patent); Standard
Oil Co. v. United States, 221 U.S. 1, 75 (1911) (discussing whether a monopoly existed as
a result of corporate combinations and stock transfers); and United States v. Grinnell252 HASTINGS BUSINESS LAW JOURNAL 17:2
create an exhaustive list.64 Conduct that does not amount to market
abuses, such as non-predatory price-cutting (where the price is not
below costs), are not a violation of Sherman §2’s conduct prong as
courts do not want to harm efficiency, risk taking and innovation.65
In section A below, Monopoly Power, I discuss the traditional
mechanisms to determine if defendant[s] control price – direct
evidence and a market share analysis. Generally, control of a pricing
benchmark provides direct evidence of price control. Additionally,
the duration of control will be addressed. In section B below, Willful
Acquisition or Maintenance – The Conduct Prong, I explore how
manipulation of a pricing benchmark satisfies the conduct prong of
Sherman §2.
A. MONOPOLY POWER
The key to monopoly power is the power to control prices or
eliminate competitors.66
While this definition of monopoly power allows evidence of
either the ability to control prices or conduct that eliminates
competitors, both evidentiary factors relate to the same concern – a
private party’s ability to artificially set prices rather than prices being
Corp., 384 U.S. 563, 576 (1966) (considering restrictive agreements that preempted
competition as a factor in determining whether a monopoly existed).
64. Verizon Commn’cs, Inc. v. Curtis V. Trinko, L.L.P., 540 U.S. 398, 414 (2004) (citing
United States v. Microsoft Corp., 253 F.3d 34, 58 (D.C. Cir. 2001) (per curiam)).
65. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 594, 602-03
(1986) (discussing how cutting prices is a common way to increase business and is at the
core of competition; id. (“[W]e must be concerned lest a rule or precedent that authorizes
a search for a particular type of undesirable pricing behavior end up by discouraging
legitimate price competition.”) (quoting Barry Wright Corp. v. ITT Grinnell Corp., 724
F.2d 227, 234 (1st Cir. 1983) (internal citation marks omitted); see also Brooke Groupe Ltd.
v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 226 (1993) (citing Cargill, Inc. v.
Monfort of Colo., Inc., 479 U.S. 104, 121 n.17 (1986)) (referencing the chilling effect that
mistaking price cuts to increase business for predatory pricing may have on competition);
Atl. Richfield Co. v. USA Petroleum Co., 495 U.S. 328. 340 (1990) (stating that low prices
benefit customers and, as long as they are not predatory, do not threaten competition);
Pac. Bell Tel., 129 S. Ct. at 1118 (citing United States v. Colgate & Co., 250 U.S. 300, 307
(1919)); but see Verizon Commc’ns Inc., 540 U.S. at 409 (“The unilateral termination of a
voluntary [and thus presumably profitable] course of dealing suggested a willingness to
forsake short-term profits to achieve an anticompetitive end.”); Jefferson Parish Hosp.
Dist. No. 2 v. Hyde, 466 U.S. 2, 11-12 (1984), superseded by statute on other grounds, Act
of Nov. 19, 1988, Pub. L. No. 100-703, §201, 102 Stat. 4674, 4676 (codified at 35 U.S.C. §
271(d) (2006)), as recognized in Ill. Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28, 31
(2006).
66. E. I. du Pont de Nemours, 351 U.S. at 391.2021 FINANCIAL BENCHMARK CONTROL 253
set by non-biased market dynamics (primarily supply and demand).
Simply put, if one can eliminate competitors one can better control
price. In this section we examine how to establish an ability to control
price when one controls a pricing benchmark. The primary evidence
used to establish an ability to control price comes from two main
sources: first, direct evidence of actual price control and, second,
evidence of market power.
i. Direct Evidence
Evidence of monopoly power may be established through direct
evidence of actual price control.67 As discussed below, this method
of establishing monopoly power is prevalent in benchmark antitrust
litigation. Basically, direct evidence of price control requires
defendant(s) to have actually raised or lowered price due to the
anticompetitive conduct in question. If direct evidence of price
control exists, plaintiff’s evidentiary burden is lessened regarding the
monopoly power prong, but there still needs to be some evidence of
the relevant market.68 This, inevitably leads to the question: what
67. Eastman Kodak, 504 U.S. at 477-78; F.T.C. v. Indiana Fed’n of Dentists, 476 U.S. 447,
460-61 (1986); Paramount Media Group, Inc. v. Village of Bellwood, 929 F.3d 914, 922 (7th
Cir., 2019); Wacker v. JP Morgan Chase & Co, 678 Fed.Appx 27, 30 -31(2d Cir. 2017); Mylan
Pharmaceuticals Inc. v. Warner Chilcott Public Limited Company, 838 F.3d 421, 434 (3d
Cir. 2016); Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 307 (3d Cir. 2007); Harrison
Aire, Inc. v. Aerostar Intern., Inc., 423 F.3d 374, 381 (3d Cir. 2005); Geneva Pharmaceuticals
Technology Corp. v. Barr Laboratories Inc., 386 F.3d 485, 500 (2d Cir. 2004); Arani v.
TriHealth Inc., 77 Fed.Appx. 823, 826 (6th Cir. 2003); Tops Mkts., Inc. v. Quality Mkts., 142
F.3d 90, 98 (2d Cir. 1998) (citing K.M.B. Warehouse Distribs., Inc. v. Walker Mfg. Co., 61
F.3d 123, 128 (2d Cir. 1995)); Heerwagen v. Clear Channel Commc’ns, 435 F.3d 219, 227
(2d Cir. 2006); Geneva Pharm. Tech. Corp. v. Barr Labs. Inc., 386 F.3d 485, 500 (2d Cir.
2004); PepsiCo v. Coca-Cola, 315 F.3d 101, 107 (2d Cir, 2002); Merced Irrigation District v.
Barclays Bank PLC, 165 F.Supp.3d 122, 141-42 (U.S.D.C., S.D. N.Y., 2016); Todd v. Exxon
Corp., 275 F.3d 191, 206 (2d Cir. 2001); Flegel v. Christian Hosp., 4 F.3d 682, 688 (8th Cir.
1993); Re/Max Intern., Inc. v. Realty One, 173 F.3d 995, 1018-19 (6th Cir. 1999); Rebel Oil
Co. v. Atlantic Richfield Co., 51 F.3d 1421, 1434 (9th Cir. 1995), Greyhound Computer
Corp., Inc. v. International Business Machines Corp., 559 F2d 488, 503-04 (9th Cir. 1977);
2A PHILLIP E. AREEDA, ET AL., AREEDA & HOVENKAMP’S ANTITRUST LAW, 531a,
at 156 (2002) (“AREEDA & HOVENKAMP”); John B. Kirkwood, Market Power and
Antitrust Enforcement, 98 B.U. L. REV. 1169, 1195-96 (2018) (citing Toys “R” Us, Inc. v. FTC,
221 F.3d 928, 937 (7th Cir. 2000)).
68. Heerwagen v. Clear Channel Commc’ns, 435 F.3d 219, 229 (2d Cir. 2006); Merced
Irrigation District, 165 F.Supp.3d at 141; Broadcom Corp., 501 F.3d at 307; Toys “R” Us, F.3d
at 937 (“proof of actual detrimental effects, such as a reduction of output,” can obviate the
need for an inquiry into market power, which is but a “surrogate for detrimental effects.”);
Concord Assocs., 817 F.3d at 53; Republic Tobacco Co. v. N. Atl. Trading Co., 381 F.3d 717,
737 (7th Cir. 2004);); Flegel, 4 F.3d at 688 (quoting Indiana Fed’n of Dentists, 476 U.S. at 461);
Re/Max Intern., Inc., 173 F.3d at 1018-19.254 HASTINGS BUSINESS LAW JOURNAL 17:2
relevant market evidence is needed when one is relying on direct
evidence of price control?
As discussed below, when one is relying on circumstantial
evidence of price control based upon market share analysis, there
must be evidence of the product market including substitutes.
Substitutes include sufficiently similar products where a consumer
will change from the product in question to a substitute if there is a
small but significant, non-transitory increase in price (SSNIP).69 The
inclusion of substitutes reduces market share, thus reducing
plaintiff’s probability of success in establishing an antitrust claim.
But, with direct evidence, evidence of substitutes or the lack thereof
is not necessary thus reducing plaintiff’s evidentiary burden and,
potentially, increasing the chance of success in establishing the
monopoly power prong.70
ii. Benchmark Cases Applying Direct Evidence
While direct evidence of monopoly power is rare,71 it is
ubiquitous in antitrust benchmark cases. This is so because in non-
benchmark cases, the direct evidence plaintiffs must produce
includes evidence of supracompetitive pricing and restricted output
or significant barriers to entry.72 This creates a difficult evidentiary
burden for plaintiffs in the non-benchmark, direct evidence cases.
The cases discussed below provide examples of direct evidence in
pricing benchmark cases relevant to the issue of monopoly power as
the ability to control prices.
In Shak v. JPMorgan Chase & Co.,73 plaintiffs alleged a Sherman §2
violation pleading direct evidence of monopoly power over the silver
futures market. Here, defendants are alleged to have manipulated
the price by making large, uneconomic, spread bids and offers which
would influence the futures contracts benchmark in favor of
defendant.74 Of note, it was also alleged that defendant had a
“dominate” market position in certain spread contracts relating to the
69. Horizontal Merger Guidelines, U.S. Dept. Justice and Federal Trade Commission, §
4.1 (Aug. 19, 2010).
70. Heerwagen, 435 F.3d at 229; In re: Zinc Antitrust Litigation, 2016 WL 3167192.
71. Mylan Pharmaceuticals Inc., 838 F.3d at 434.
72. Harrison Aire, Inc., 423 F.3d at 381; Broadcom Corp., 501 F.3d at 307; Id., at 434.
73. Shak v. JP Morgan Chase & Co., 156 F.Supp.3d 462 (S.D.N.Y., 2016).
74. Id. at 470.2021 FINANCIAL BENCHMARK CONTROL 255
silver futures market, but a detailed, market share analysis was not
required.75
In Wacker v. JP Morgan Chase & Co,76 plaintiffs adequately alleged
monopoly power under a direct evidence standard by pleading
control of long-dated silver futures contracts where defendants
manipulated silver benchmarks.77
In Merced Irrigation District v. Barclays Bank PLC,78 Merced alleged
that Barclays manipulated an electricity price benchmark, the
Intercontinental Exchange (“ICE”) which directly affected the Dow
Jones Daily Index price for peak power at the Northern California
trading hub known as North Path 15. This was price manipulation
causing prices to go up or down depending on Barclay’s trading
position. The relevant Dow Jones Daily Index in this case was based
upon index prices published by ICE which was based upon a
weighted average price of all day-ahead fixed-price physical
electricity transactions at the relevant location. Merced bought peak
power electricity at the North Path 15, a northern California trading
hub. Merced alleged a Sherman §2 violation as the Barclays
manipulation of the ICE benchmark amounted to control of electricity
prices in the Northern California North Path 15 geographic area. This
was sufficient to plead monopoly power by alleging direct evidence
of the ability to control a pricing benchmark.
In re Term Commodities Cotton Futures Litig.,79 is another Sherman
§2 direct evidence case where futures prices for cotton were
manipulated upwards to the benefit of defendant and showing an
ability to control price without a detailed market share analysis.
However, it was alleged that defendant controlled 99% of the relevant
market, which is a sufficient market share to establish price control.
In re Crude Oil Commodity Futures Litig.,80 involved Sherman § 2
claims stemming from an alleged scheme to manipulate futures
prices for West Texas Intermediate (WTI) crude oil. Plaintiffs alleged
that defendants acquired a substantial long position, acquired a
dominant position (roughly 92%) in physical WTI crude oil thereby
driving up the price, acquired a substantial short position and
liquidated its physical WTI position on a date benefitting defendants’
75. Id. at 484-90.
76. Wacker, 678 Fed.Appx at 30-31.
77. Id.
78. 165 F.Supp.3d at 128-30.
79. In re Term Commodities Cotton Futures Litig., No. 12 Civ. 5126, 2013 WL 9815198.
80. In re Crude Oil Commodity Futures Litig, 913 F.Supp.2d 41, 46-53 (S.D.N.Y.2012).You can also read
